Housing market 'biggest risk' to UK economy but raising interest rates would be 'very blunt' way to tackle problem, says senior Bank of England official

The housing market is the ‘biggest risk’ to the UK economy but raising interest rates would be a ‘very blunt’ way to tackle the problem, a senior Bank of England official said yesterday.

Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said rising house prices could lead to a sharp increase in debt levels as buyers are forced into taking on ever-larger mortgages.

He warned that such an outcome would leave the UK ‘more exposed’ to shocks which could ‘derail’ the economy.

The comments came a day after figures showed house prices across the UK rising at the fastest rate for nine years, led by a 26 per cent increase in London.

Cunliffe said: ‘The main risk we see arising from the housing market is the risk that house prices continue to grow strongly and faster than earnings and this increase in prices leads to higher and more concentrated household indebtedness.

‘In short, the risk that more people take on higher debt relative to their income as they have to stretch further to buy homes.’

But with speculation mounting that the Bank will raise interest rates before the end of the year, having held them at 0.5 per cent since March 2009, he said rate hikes were a last resort.

‘Using interest rates to deal with financial stability risks can carry a high cost,’ Cunliffe said.

‘So although it is an effective line of defence, it should be seen as one of the last lines of defence.’